Surge of new ESG products to woo investors

Alexandra Cain

Aug 30, 2019 — 11.00pm

After a decade of largely stagnant ethical investment offerings, the last two years have seen a significant number of new products hit the market. Experts say this is an indication investment products with environmental, social and governance themes are poised to become mainstream.

ESG ETFs are part of this trend. Investors are warned, however, to separate green wash products from those that truly meet consumer's ethical objectives.

"Make sure the fund is actually as green as it claims. The industry likes to claim ESG factors are rigorously incorporated into research before buying stocks. In reality, after checking portfolio holdings, most of these funds fail the consumer test," says Stuart Barry, practice principal of financial advice firm Tas Ethical.

Bell Direct's Julia Lee : ESG is gaining in popularity as another way to analyse risk. Supplied

As a result, Barry recommends ethical ETF investors check the ETF's stock holdings. "This is the only way investors can cut through the green wash and ensure an ETF meets their ethical criteria," he says.

Investor pressure is another reason behind the rise of green ETFs. Says Barry: "Many institutional investors are receiving strict instructions from their clients that ESG needs to be a top consideration in any portfolio to make sure their views on making the world a better place are appropriately transmitted in their investments. At an individual investor level, there is a growing view that focusing on companies with a clear ESG bias will reinforce this virtuous circle."

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One new green ETF is the VanEck Vectors MSCI International Sustainable Equity ETF. Managing director Arian Neiron says it is becoming more important for some investors to align their long-term investment strategy to their underlying investors' values.

"We're seeing many institutional clients such as universities and big pension funds demand sustainable investing policies, which is driving change in the asset management industry," he says.

Neiron notes ethical investing means different things to different people. "The beauty of the ETF format is that if you don't agree with a particular exclusion, for example stocks whose underlying business relies on genetically modified organisms, you can buy VanEck Vectors MSCI International Sustainable Equity ETF, but then add GMO companies to your portfolio."

He says while excluding some companies is required when investing according to ESG principles, completely removing some sectors could create concentration risk in the portfolio. "This is why inclusions are also important. Our fund includes only the top 15 per cent of ESG leaders in each sector as determined by MSCI.

"This is important, as we found that a screen strictly removing companies involved in animal testing completely removed important sectors like healthcare and consumer discretionary from the portfolio and we did not want to create a portfolio in which certain sectors like IT could dominate.

"There are important names in these sectors that have the same goal as sustainable investors – to make the world a better place for future generations. Many of these companies work with organisations like PETA to ensure research meets its strict guidelines."

Interestingly, Julia Lee, equities analyst at Bell Direct, says ESG is gaining in popularity as another way to analyse risk.

This market is dominated by a few products, says Lee.

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"With the area being relatively new, there is not a huge amount of historical data on which to rely to make investment decisions. Investors need to do due diligence and work out expected return and major risks and catalysts for the portfolio," she says.

Ilan Israelstam, head of strategy, BetaShares, says its responsible investment product suite has been popular since its launch just over a year ago, with $280 million invested in these ETFs. BetaShares also runs an Australian Sustainability Leaders ETF.

"Using our ETF funds, investors are able to access a portfolio of sustainable, ethical Australian or global companies in one trade. Most importantly, people who invest in these products do not necessarily have to sacrifice performance," Israelstam says.

For example, both BetaShares' ethical ETFs have outperformed benchmark global and Australian indices. Its international fund has outperformed the benchmark MSCI world index by 4 per cent each year.

"The greatest reason for the success of these new products is that they are designed to be true to label, due to the broad exclusion screens used and rules which focus the product on sustainable businesses. So investors are able to feel confident they are investing in companies that are compatible with their values," Israelstam says.

Broadly speaking, demand for sustainable investing products is on the rise in Australia. Investors, especially younger ones, are conscious about where their money goes and how it supports certain business activities.

"We believe this increased consciousness regarding financial investments is a strong and positive trend, which will continue to gain relevance. In addition, many investors who are seeking out the benefits of ETFs are choosing to do so while at the same time being considerate of responsible investment objectives," he says

As with all ETFs, the risks associated with green products relate to the risks in the underlying investments. So the performance of a responsible investment product focused on equities will still depend on what's happening in the sharemarket.